A &l;a href=&q;https://www.creditcards.com/credit-card-news/late-payment-survey.php&q; target=&q;_blank&q;&g;new study&l;/a&g; by CreditCards.com sheds more light on a common credit myth that causes millions of Americans to underpay their credit card balances in an effort to improve their credit score.
While the components that make up your credit score are &l;a href=&q;https://www.myfico.com/credit-education/whats-in-your-credit-score/&q; target=&q;_blank&q;&g;publicly disclosed&l;/a&g;, the actual calculation itself is shrouded in mystery. Many consumers struggle to understand what types of actions will help or hurt their score. For example, while opening a new credit card may temporarily ding your score a small amount, it can actually improve your score in the long run because higher cumulative credit limits result in lower utilization (the amount of your total credit line that you use).
It&a;rsquo;s no wonder then that credit myths run wild. One myth in particular is costing unsuspecting consumers millions of dollars in unnecessary interest fees.
&l;strong&g;Carrying a Credit Card Balance Does Not Help Your Credit Score&l;/strong&g;
The CreditCards.com &l;a href=&q;https://www.creditcards.com/credit-card-news/late-payment-survey.php&q; target=&q;_blank&q;&g;study&l;/a&g; found that a&l;span&g;lmost one quarter of cardholders who carry a balance choose to do so not because they can&s;t pay the balance down, but for the express purpose of improving their credit score - despite the fact that doing so has absolutely no discernible impact on credit scores. Similarly, &l;a href=&q;https://www.nerdwallet.com/blog/finance/bad-credit-score-survey/&q; target=&q;_blank&q;&g;another survey by Nerdwallet&l;/a&g; found that more than 40% of Americans mistakenly believe this myth that carrying a balance month-to-month like this will help their credit score. &l;/span&g;
&l;span&g;Fortunately, there is no truth to this concept.&a;nbsp;&l;/span&g;Lenders checking your credit report can see the utilization reported by your credit card issuer and whether or not you pay your bills on time. However, they won&a;rsquo;t actually know whether you carry a balance month-to-month or whether you pay it in full.
&l;strong&g;What This Means for Your Wallet&l;/strong&g;
When you carry a balance just to try to help your credit, you&a;rsquo;re literally just throwing your money away! With credit card APRs averaging in the &l;a href=&q;https://www.creditcards.com/credit-card-news/good-apr-interest-rate.php&q; target=&q;_blank&q;&g;mid-to-high teens&l;/a&g;, carrying a balance when you can otherwise afford to pay it off can be an expensive and unnecessary mistake. For example, carrying a balance of $600 month-to-month can cost over $100 a year in avoidable interest fees, money that could be better used to pay down other debts, save up for a big purchase, or contribute to a retirement account.
&l;strong&g;What&a;nbsp;Does&a;nbsp;Go into Your Credit Score?&l;/strong&g;
Most myths are based in some fact, and this one is no different. The second largest portion of your credit score is your &a;ldquo;Amounts Owed,&a;rdquo; or what portion of your credit lines you use - often called your utilization. Having a positive utilization can be seen as better than 0% utilization, and &l;a href=&q;https://www.creditkarma.com/article/creditcardutilizationandscore&q; target=&q;_blank&q;&g;studies from Credit Karma&l;/a&g; show this to be generally true across many consumers. On average, consumers with zero utilization on their credit card accounts have lower credit scores than those with low but positive utilization. This means that using your card and having a balance could be better for you than not using your card at all.
So why the confusion? Many consumers have misinterpreted what it means to have positive utilization. According to the Fair Issac Corporation, the company behind the ubiquitous FICO credit score, &a;ldquo;Your account balance on your credit report will reflect the account balance your lender reported to the credit bureau (typically the balance from your latest monthly statement)&a;rdquo; and &a;ldquo;even if you pay off your credit cards in full each month, your credit report may show a balance on those cards.&a;rdquo; In other words, your credit card issuer will report your statement balance regardless of how much of that statement balance you pay off and when.
Nowhere in the calculation is there any mention of an interest-accruing balance that is carried month-to-month; yet some consumers still mistakenly think that in order to prove they can use credit responsibly and show some utilization, they do need to carry a balance month to month. Ultimately, paying your statement balance in full to avoid interest and late fees will still demonstrate utilization.
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&l;strong&g;Why Utilization Matters at All&l;/strong&g;
Future potential lenders want to know that you can manage credit effectively. Using a credit card responsibly and paying it off on time demonstrates a trustworthy pattern. Not using a card at all makes it harder to predict how you would handle credit when you do need it. On the other side of the same coin, using a high percentage of your outstanding credit line might worry a future lender that you have already overextended yourself and may max out any new line of credit. Having a low, but positive, utilization is the ideal middle ground and is typically best for your credit.
&l;strong&g;The Best Way to Optimize Credit Utilization&l;/strong&g;
If you really want to game your credit utilization and improve your credit score, your best bet is to make a payment right before your issuer reports your balances. This date is typically your statement date, as mentioned, but you can confirm for any specific credit card by looking at a recent credit report to see when the balance on&a;nbsp;that card was reported. Once you know the date your balance is reported to the bureaus, pay a portion but not all of your current balance down to about 1-2% of your credit limit just beforehand every month. Then, make sure you pay off any remaining statement balance before your due date to avoid any interest. At the end of the day, there&a;rsquo;s no need to incur any fees at all!&l;/p&g;
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